Is Critical Metals Stock Going to $0 Before It Ever Becomes a Real Miner?

Up an astounding 687% in share price over the past year -- but down 34% from its peak hit back in January -- rare-earth mining company Critical Metals (NASDAQ: CRML) was one of the hottest bets on the stock market...until all of a sudden, it wasn't anymore.

Today, investors have to be wondering: Will this would-be rare-earth miner ever move beyond its start-up stage and actually get a chance to mine some rare-earth elements? Or will it go bust before that happens?

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Critical math

It's a worthwhile question to ask. Let me see if I can answer it for you with math.

Critical Metals owns 92.5% of a rare-earth field in Greenland known as the Tanbreez project. Analysts think there's a fair chance this project will turn a profit if Critical Metals can stay in business long enough to realize it. Long-term forecasts by Wall Street bankers anticipate Critical Minerals will start mining operations in 2028 and generate revenue of $35 million that year.

By 2029, revenue could double to $70 million, permitting Critical Metals to flip from investing in the project to profiting from it. Forecasts see positive free cash flow emerging in 2029, and nearly doubling to $31 million by 2030.

But here's where things get tricky.

To reach positive FCF in 2029, Critical Minerals must first make massive cash investments to develop its property. Estimates provided by S&P Global Market Intelligence anticipate that more than $450 million must be invested between now and then.

Unfortunately for its investors, Critical Metals only has about $80 million in the bank at present.

Is Critical Metals stock going to $0?

So Critical Metals is going to run out of cash first; that doesn't necessarily mean its stock will go to zero, though. Before going bankrupt, the company is almost certain to try to raise cash, either by borrowing it or, more likely, by issuing and selling stock.

The crucial question is how much stock.

Let's assume Critical Metals decides to rip off the bandage and raise cash right away. Raising $450 million at the current stock price of $13.50 would require issuing 33.3 million new shares. (Actually, probably more than that, because the company would sell its stock at a discount to attract buyers fast.)

Even selling just 33.3 million shares, though, would dilute Critical Metals' existing shareholders out of 26% of their stake in the company. But here's the good news: If that resulted in a similar 26% decline in the stock price, it would imply Critical Metals shares will trade for $10. It won't be a pleasant drop. Shareholders won't enjoy it.

But it's still a lot better than $0.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.